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Bond prices mostly flat; Fed announcement eyed

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U.S. Treasury prices were little changed on Tuesday after a $32 billion auction of two-year fixed-rate notes and as investors awaited the outcome of a two-day Federal Reserve policy meeting.

The Treasury Department auctioned the notes at a high yield of 0.380 percent. The bid-to-cover ratio, an indicator of demand, was 3.30.

At its meeting, which starts later Tuesday, the U.S. central bank will consider whether to further scale back its bond-purchase program, which is aimed at holding down long-term borrowing costs to help the economy.

Analysts said investors are reluctant to buy safe-haven bonds on fears that any surprise in the Fed statement could derail this month's rally in Treasury prices.

"Investors are having reticence about the level of the market in the face of the Fed announcement," said Robert Tipp, chief investment strategist at Prudential Fixed Income in Newark, New Jersey.

(Watch: Fed survey: Optimism in stocks rises)

In December, the Fed reduced its monthly purchases of Treasuries and mortgage-backed securities by $10 billion to $75 billion. Some analysts expect the Fed will cut purchases by another $10 billion this week. The Fed will issue its policy statement at the close of its meeting on Wednesday afternoon.

Commerce Department data showing orders for long-lasting U.S. manufactured goods unexpectedly fell in December by 4.3 percent initially spurred safe-haven bids and a rise in Treasury prices, but the gains were short-lived as worries set in surrounding the Fed outcome.

The weak data capped losses in Treasury prices, however. "This weaker data print has forestalled the correction in the Treasury market," Tipp of Prudential said.

Prices on benchmark 10-year Treasury notes were little changed from Monday, with the yield at 2.759 percent.

Emerging market assets stabilized on Tuesday after three straight days of intense selling, limiting safe-haven bids for Treasurys.

The Turkish central bank raised its overnight lending rate to 12% from 7.75% and the overnight borrowing rate to 8% from 3.5%. The central bank met Tuesday in its first extraordinary meeting since 2011.

Local investors have been selling off their lira in favor of foreign currencies, and international investors have been staying away from the lira, pushing its value down to record lows. The cost of Turkey's debt is also rising alarmingly quickly, with 10-year debt hitting 10.45 percent, its highest since 2010.

"The market is keeping an eye on what Turkey is going to do and what the Fed is going to do," said Lou Brien, market strategist at DRW Trading in Chicago. "That safe-haven bid seems to be taking a break," he said.

(Read more: Turkey in massive rate hike to defend lira)

Positive U.S. economic data on home prices and consumer confidence, meanwhile, had little impact on Treasury prices.

"The market is able to disregard data while they wait for what could be the more important information," said Brien of DRW Trading.

U.S. single-family home prices in November rose slightly more than expected from the previous month, a survey showed Tuesday, while their increase from a year ago was the biggest in almost eight years.

The S&P/Case Shiller composite index of 20 metropolitan areas gained 0.9 percent on a seasonally adjusted basis. The 20-city composite index rose 13.7 percent year-on-year, the largest rise since February 2006.

U.S. consumer confidence meanwhile rose in January as consumers grew more optimistic about both business conditions and the job market.

The Conference Board, an industry group, said Tuesday its index of consumer attitudes rose to 80.7 from an downwardly revised 77.5 in December. Economists polled by Reuters had expected a reading of 78.1.

The Fed bought $2.99 billion in U.S. government debt that matures May 2021 to August 2023 for its third round of quantitative easing, which had little impact on bond prices.

—By Reuters with CNBC.com

Correction: This story has been updated to reflect the correct high yield of the auction.

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